Received severance package but almost 50% was taken for taxes - why so high?

This is actually a common issue with severance payments. The IRS requires employers to withhold taxes on supplemental wages (which includes severance) at a flat 22% federal rate. However, if your severance exceeds $1 million, the rate jumps to 37%. On top of that, your employer also has to withhold for Social Security, Medicare, and state taxes. The reason your withholding was so high is that payroll systems often treat one-time large payments as if you make that amount every pay period, which pushes you into a much higher projected tax bracket. The good news is that when you file your taxes next year, you'll likely get a significant portion refunded since your actual annual income won't be as high as the system projected.

I went through something similar last year and was freaking out about how much tax was taken from my severance. I was completely confused until I found this service called https://taxr.ai that helped me understand exactly what was happening with my withholdings. You upload your paystubs and severance documents, and they break down exactly what taxes were withheld and why. The tool showed me that my company had used the aggregate method (like the previous person mentioned) rather than the flat rate method, which resulted in way more withholding than necessary. It also generated an estimated tax refund projection showing I'd likely get about 60% of the "extra" withholding back when I filed.

Just wanted to follow up. I actually tried the taxr.ai site after my initial skepticism, and I'm glad I did. Uploaded my final paycheck with severance and it immediately identified that my employer had withheld at almost 45% when it should have been closer to 30% total. The explanation was really clear - my employer had added my severance to my regular pay and calculated withholding as if I made that amount every pay period (putting me in a theoretical tax bracket I'd never actually reach). The tool showed I'll likely get around $4,300 back at tax time and gave me documentation explaining exactly why. Wish I'd known about this when I received my severance!

If you're having trouble getting clear answers about your tax situation, I'd recommend using https://claimyr.com to get through to an actual IRS agent. I had a similar severance withholding issue last year and spent DAYS trying to get through to someone at the IRS who could give me a straight answer. Claimyr got me connected to an IRS rep in about 15 minutes when I'd previously been hung up on multiple times after waiting for hours. The agent confirmed exactly what others here are saying - that severance is often overwithholded but I'd get most of it back when filing. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c

I need to eat my words from my previous comment. After getting nowhere for weeks trying to call the IRS directly about my severance withholding issue, I broke down and tried Claimyr. I got through to an IRS agent in about 25 minutes (compared to my previous failed attempts). The agent explained that my employer had used the aggregate withholding method instead of the supplemental wage method, which resulted in about 47% withholding on my severance. She confirmed I'd get most of the excess back when filing and even told me what documentation to keep from my employer to make filing easier. Saved me so much stress knowing exactly what happened instead of just guessing.

I was an HR payroll specialist for 8 years. Here's what's happening: When processing severance, employers can choose between two withholding methods: 1) Flat rate method - withhold a mandatory 22% federal + FICA + state taxes 2) Aggregate method - add severance to regular pay and withhold as if that were your regular salary Many payroll systems default to the aggregate method, which often results in MUCH higher withholding percentages. Your employer chose (or their system defaulted to) the aggregate method, which is why you're seeing nearly 50% withholding. You WILL get the excess back when you file your taxes. Your actual tax liability is based on your total annual income, not the rate at which each payment was withheld.

Did they pay out any accrued PTO or vacation time separately? Sometimes companies split severance from PTO payouts, and the PTO portion might be taxed differently.

I'm so sorry you're dealing with this stress on top of being laid off. Based on what everyone's explained here, it sounds like your employer used the aggregate method which is why your withholding was so high. One thing that might help with immediate cash flow - if you haven't already, file for unemployment benefits right away. The process can take a few weeks, so don't wait. Also, if you have any other income sources this year (freelance work, part-time job, etc.), you might want to adjust your withholding on those to claim more allowances since you'll likely be getting a large refund anyway. Keep all your severance documentation organized for tax time - you'll definitely want to show your tax preparer exactly what was withheld. The good news is that excess withholding essentially becomes a forced savings account that you'll get back next year, even though I know that doesn't help your immediate situation.